Written by Rachel MacRae, B-Compliant
As the Consumer Duty deadline creeps closer, time is running out to deliver the relevant changes. For smaller firms, this might be easier said than done.
Much of the FCA’s recent support work and good/poor practice examples are geared towards larger organisations, and whilst the regulator acknowledges that the level of detail is lesser for smaller firms, their observations will still be relevant albeit on a proportionate basis.
Proportionality is often a phrase that the FCA likes to dangle in front of firms when it pushes out new outcome-based guidance; it seems like a sensible approach, especially when a policy change is as wide ranging as Consumer Duty (impacting any firm that deals with a retail customer). However, what does this mean and what does a proportionate approach to the Consumer Duty actually look like for small firms?
You are not alone in asking this question, and the task of determining what is proportional can be an overwhelming one; but small firms shouldn’t despair. This article will help you to engage with the relevant aspects of the duty and prioritise the most important areas.
Before a small firm can scale down the FCA’s rules and guidance, first you need to establish what is reasonable, based on all of the relevant circumstances. Ask yourself three questions:
- What is the purpose of the product or service on offer?
Can you articulate the benefit of using this, looking beyond the list of features, and think about how this product or service makes the customer’s life easier, enjoyable or helps them achieve their goals.
- What kind of clients do you do business with?
Are your clients savvy, do they have a good grasp of the area you do business in, do they just need a light touch approach, or is your client base particularly susceptible to vulnerability?
- What influence do you have in relation to the product and/or service?
Look at where you are in the distribution chain and think about how much influence the firm has on the four outcomes, including the ability to either cause or even prevent harm from occurring.
Defining and outlining the above, if you haven’t done this already, will provide smaller firms with the building blocks to develop a proportionate approach to the duty.
One of the cross-cutting rules, and in my opinion the most important one, is to avoid causing foreseeable harm to retail customers. Being able to articulate the friction points within your service proposition or the areas where there is a greater risk of the firm acting (or not acting) in a way that could cause harm, is key within a firm of any size.
Why is looking at risk of harm especially important in a proportionate approach you ask? Small firms are often time or resource poor so when it comes to prioritising, knowing where the greatest risks of harm are, allows you to focus this resource on those areas.
Look at your client journey and ask yourself: if all of your mitigants or controls failed, when could harm occur and what might this look like? For example, a sole adviser firm is more susceptible to risks in delivering client support, especially if there is absence or illness. If a client required urgent support during an absence and they were unable to access this (or an alternative), there is a risk that they could be inconvenienced, distressed, or suffer unintended financial consequences, such as investment loss or extra charges, including tax or additional advice costs.
Make sure your firm is able to monitor the risks in these areas and has a plan in place for what to do when you identify an issue.
If it isn’t written down, it didn’t happen.
This one seems obvious, but with small firms there is often a tendency to rely on one person’s knowledge of a client, or how a process works. As the FCA’s supervision strategy will be data led, record keeping will be key. Good examples of this include:
- If you haven’t recorded a particular client’s characteristics of vulnerability, or your approach to dealing with this, start a register or think about where you would document this on your client’s records, so it is easily identifiable should anyone else have to review the file.
- When thinking about the price and value outcome, don’t focus solely on the charges of your service. Value is in the eye of the beholder, if your clients tell you that they love your service, make a note of this or save the email. By having a record of this somewhere, it will put you in a better position to be able to show that there is value in your service.
Implementing the Consumer Duty is not about reinventing the wheel, it is about documenting what you already do to show how this aligns to the principle of the duty. Where there are gaps, you focus change in these areas.
Know your worth
Small, as they say, is mighty. Whilst there is a focus on the challenges in how the Consumer Duty can be applied to small firms, what I feel is often overlooked, is that it is exactly these firms that will have a better understanding of their clients, and their respective needs.
Typically, a smaller firm will have a more personal or direct relationship with clients when compared to larger contemporaries and they can be nimble when making changes, or adapting to a specific need. There is also less of a need for reems of policy or process, and oversight will be less onerous because the people in charge are closer to the operational side of the business.
In recognising where your worth is and where your time and resource are best spent, look at whether there is merit in utilising tools or external services where possible. If you have compliance support, engage with them and ask what they can do to help, or consider utilising the tools of services such as Elevation. Whilst external support might not be a complete solution, it could free up your time to spend on what matters most; delivering the best outcomes for your clients.